IRELAND AND GREECE

Financial issues affecting Greece and Ireland

Assignment 1: Financial issues affecting Ireland

Introduction

In 2000-2007, Ireland performed better than any other OECD country. Government expenditure rose steadily with a 40% increase in the public sector employment. Imbalances in banking, the housing market, the government budget and the labour market are gradually being unwound. The process, however, has had a large negative impact on public debt and unemployment.

Discussion and Analysis

According to World Bank reports, Ireland's GDP per capita rose to 65% of the EU average by the 1980s, passed 70% of the average in 1990 and exceeded it in 1999. Ireland's GDP growth averaged 8.5% during the latter half of the 1990s. Ireland named the 1990s the 'Celtic Tiger' period to signify its transformation from one of Europe's poorest countries to one of its wealthiest. (Jones, 2003, 24)

Economic Structure and Major Industries

The banking industry continues to face a challenging environment. Deposit insurance been increased and liquidity assistance offered by the government. Tight liquidity and a rise in the percentage of non-performing loans increase strains on the banking system. Only one bank failed to pass the stress tests conducted in July 2010 but bank profitability remains weak. (Ferguson, 2002, 75)

Government Finance

Ireland's hopes of an economic turnaround weighed down by the on-going process of correction of pre-crisis imbalances. After falling three consecutive years, real GDP expected to rise by 0.9% in 2011. Stronger rates of economic growth should be realised in the medium term. Inflation has been very low but is creeping up. Prices expected to rise by 0.9% in 2011. If oil prices remain high, they should drive up the rate of inflation during the year.

Initially, the recovery will be export-driven. Spill overs to the domestic economy could be limited however, because of exporters' heavy reliance on imports. Consumer spending should gradually rise to the medium term but will remain well below pre-recession rates. Small and medium-sized businesses complain that it is hard to access finance. (Roy, 2002, 130)Foreign Trade

According to the finance ministry, Ireland's banks face a capital shortfall of as much as €32 billion and the government is liable to up to three-quarters of this sum. Officials expect that the government could now end up as majority owner of all the country's large banks except the Bank of Ireland. (Wong, 1997, 97)

Unemployment rose to 13.5% in 2010 but should fall to 13.0% in 2011. Long-term unemployment has more than doubled since 2007. The government has reached an agreement with trade unions which requires that any future pay increases in the public sector will be contingent on equivalent savings from the improved delivery of public services. (Schumpeter, 1961, 139)

Evaluation of Market Potential

The country's long-term problems are more ominous. Age-related spending is one of the highest in the EU. The IMF calculates that spending on pensions will increase by more than 12 percentage points of GDP in 2010-2050 without constitutional reforms. Pension reforms announced in 2010 will go at least part of the way toward addressing these problems. (Ferguson, 2002, 75)Business Environment

Under pressure from Brussels, the government introduced two austerity packages to deal ...